The impacts of Credit Card Debt on the Economy

Published: 11 September 2018 (1872 Views)

Consumer spending is the main driver of economic growth and citizens sometimes borrow to spend. While debt isn't a bad thing, the economy becomes unsustainable if people are burdened with too much credit debt. On the other hand, the responsible utilization of credit leads to consistent economic growth since the debt is manageable.

From the surface, credit appears like a convenient way of making purchases when you don't have the money but you expect to pay later. Of course, as a consumer, you focus on the effects of plastic money to your finances. But if you look deeper, credit cards have huge effects on the economy. In fact, it can be a major indicator of the economic situation. In this article, you will learn about the various effects of credit cards on the economy.

Credit card debts and the economy

Given the popularity of credit card debt, it is almost impossible to envision a situation where the debts are zero. Today, there are numerous offers for zero interest credit cards which entice more people to accumulate more debt. It is highly likely that consumer debt will increase, but in the unlikely event that the trend reverses, the effects can be far-reaching. Consumer spending drives more than 75% of the economy and if the expenses stopped, the Gross Domestic Product (GDP) will decline by a huge margin. Generally, the GDP is used as an indicator of the economic situation in the country.

Credit cards are some of the tools that give the citizens some significant spending power. If it were absent, unemployment would automatically kick in because some jobs become obsolete because consumers are not buying. At the same time, lenders would be forced to close their businesses and if a country doesn’t have reliable lenders, their economy would stagnate.

When a significant portion of the population restricts the usage of credit cards to necessities as opposed to entertainment, online shopping and beauty products, it shows that the economy is straining. As such, if credit card debt rises, it can be attributed to low consumer confidence and high unemployment. As such, these conditions increase the probability of defaulting among borrowers.

There is no doubt that debt can keep the economy going but this has its limits. Basically, the consistent growth will come to a halt when households start operating at a loss for a long time. The moment people start struggling to pay credit card balances, they automatically change their lifestyle to make sure funds are enough. As far as the economy is concerned, reduced standards of living are unfriendly since it leads to a recession. As a result, the government taxes are drastically reduced since the unemployment rates are quite high. To make matters worse, the government has to dedicate a significant amount of money to unemployment benefits.

Credit card debt may encourage bad spending habits

Inflated prices and wrong credit decisions as practiced by financial providers and consumers are not influenced by government alone. The truth is that a huge segment of the population can’t deal with debt in the right way. They borrow high amounts from bad credit money providers, make unnecessary purchases, skip payments and eventually become broke.

At the same time, some lenders exploit borrowers by charging too much or giving credit to people who can’t afford to borrow. It’s these weaknesses in the human nature that make credit cards a risky affair.

More often than not, the culprit here is the instant gratification since people lack patience. When there is an insatiable appetite in the market, sellers are bound to hike their prices even if this means that a consumer will incur debt to afford the purchase. The truth is that debt has become a goldmine for lenders since they can leap more thanks to an inpatient population.

This phenomenon is clearly visible in the real estate industry where it is rare to hear property investors whining about high debt levels. As such, when there is an abundance of greedy sellers matched to consumers who are eager to borrow in order to support their lifestyle, economic problems are bound to arise.

To most people, the effects of credit card debt are restricted to financial outcomes. However, there are immense moral and social implications associated with credit cards. If you look back, you can see points in history when lending was banned because people misused the service. This is quite true for individual borrowers than businesses.

How does the economy benefit?

To those who have accumulated a huge amount of consumer debt, it can be quite hard to view debt as a friendly thing. This is because you are expected to pay the amount you owe sooner or later and you may end up paying high interests. Nevertheless, credit card debt can act as a powerful catalyst to the economy.

When some people use credit cards to make a purchase, they may be tapping into this tool since they can’t afford to buy the item without credit. The fact that people are buying things that they may not have afforded, a lot of business are getting income that would have been lost if credit cards weren’t there.

Today, more than three-quarters of the American population has a credit card and almost 50% have outstanding balances. When you look closely, you can realize that all these people are making purchases just because they have access to credit cards. Otherwise, they wouldn't buy the products. As such, credit card debt can be used as an indicator of a healthy economy that's why consumer spending contributes to 75% of the GDP in the US.

Final words

It is easy for economists to discuss the pros and cons of credit cards to the economy. However, it is up to the cardholder to make a sound decision when using a credit card. The truth is that if you use a credit card judiciously, you can eventually minimize the amount of debt you carry as well as the charges associated with plastic money. By maintaining a low debt to income ratio, you can have a good credit score and you can use the credit card for emergency expenses.

However, the benefits of credit cards for the economy are not similar to personal benefits. It is not right to charge your credit cards just because it helps stimulate the economy. If you want to make the most out of your credit card, you have to be a responsible borrower. This means you only take what you need and can afford to pay. Also, budgeting is critical to responsible spending, especially when you are dealing with credit.